For the past 6 months, we have been alerting clients to the persistent decline in our Canada leading indicator. This is now showing up in numerous Canadian coincident data releases, with retail sales being the latest to miss expectations last Friday. The economic surprise index is now declining sharply and there is little sign of immediate improvement ahead.

PMIs continue to fall whilst building permits and housing starts (some of the best leading indicators to watch), remain negative yoy (top chart). However one of our main themes this year has been that of cognitive dissonance, whereby growth disappoints, but higher excess liquidity supports asset prices.

Retail sales in Canada in December posted their largest one-month drop since April 2010, as the cost to fill your gas tank plunged and holiday shoppers spent less.

Statistics Canada said Friday retail sales fell 2.0 per cent compared with November to $42.1 billion in December. That compared with a drop of 0.4 per cent that economists had expected, according to Thomson Reuters.

The drop in sales came as sales at gasoline stations fell 7.4 per cent in December due to lower gas prices, while sales at motor vehicle and parts dealers fell one per cent. Excluding motor vehicle and parts dealers, sales were down 2.3 per cent.

Despite the larger than-expected drop in sales, Bank of Montreal senior economist Benjamin Reitzes cautioned not to jump to conclusions based on the retail sales report. Reitzes noted the rise in popularity of Black Friday sales in Canada has pulled some holiday shopping into November.

Sales were down in nine of 11 subsectors, representing 71 per cent of retail trade.

Retail sales decreased for the second consecutive month in January, declining 1.7% to $41.4 billion. Sales were lower in 7 of 11 subsectors, representing 83% of retail trade.

Lower sales at gasoline stations represented the majority of the decline. Excluding sales at gasoline stations, retail sales were down 0.8%.

Retail Sales in Volume Terms Decreased 1.2%.

Gasoline Station Sales Down Seven Months in a Row

Sales at gasoline stations fell 8.8% in January, reflecting lower prices at the pump. This was the seventh straight monthly decrease and the largest monthly decline since November 2008.

Receipts at motor vehicle and parts dealers (-1.4%) decreased for the fourth consecutive month. The overall subsector decline was a result of weaker sales at new car dealers (-1.8%). Used car dealers (-0.9%) and other motor vehicle dealers (-0.5%) also registered declines. Sales at automotive parts, accessories and tire stores (+2.2%) advanced for the fourth time in five months.

Sales Down in Nine Provinces

Retail sales were down in nine provinces in January. Lower sales in Quebec, Ontario and Alberta accounted for most of the decrease.

Quebec (-2.4%) reported the largest decrease in dollar terms, with widespread declines across most store types.

The decline in Ontario (-1.4%) was mainly attributable to lower sales at gasoline stations.

Retail sales in Alberta (-2.8%) declined for the fourth consecutive month in January, reaching their lowest level since December 2013. The decline was largely a result of lower sales at gasoline stations and new car dealers.

Receipts in Nova Scotia fell to their lowest level since March 2013, decreasing for the sixth consecutive month.

Prince Edward Island (+0.5%) was the only province to register an increase in January.

Seasonally Adjusted Numbers

Economist's Theories on Gasoline

Hey wait a second. Didn't economists tell us consumers would take savings on gasoline and spend it elsewhere?

Yes they did. So there is only one possible explanation: Just as in the US, Canadian weather was much worse than economists initially thought.

Canada’s economy likely shrank in January, CIBC said Friday following an unexpectedly negative reading on retail sales from Statistics Canada.

Retail sales fell 1.7 per cent in January, StatsCan reported, the second consecutive monthly decline. Analysts had been expecting a slowdown due to lower gas prices, but they weren’t expecting the broad-based declines that were actually seen: Seven of 11 retail sectors shrank in January, including autos, furniture and food and beverages.

Canada’s GDP for January “now looks set for a modest drop,” CIBC economist Andrew Grantham wrote in a client note.

Economists had been expecting that lower gas prices would mean Canadians would spend more on other things, but that doesn't seem to be happening.

"The latest figures suggest that households are becoming more cautious in their spending habits," Grantham wrote, adding he doesn't think Canada will meet the modest 1.5-per-cent growth rate that the Bank of Canada is predicting for the first quarter of the year.

Consumers are showing signs of exhaustion, with household debt levels reaching yet another record high in the last months of 2014, up to 163.3 per cent of disposable income.

Following the rate cut, the yield curve in Canada inverted out to three
years. Inversion means near-term interest rates are higher than
long-term rates.

I saw no other person mention the inversion at the time. An inverted yield curve generally portends recession.

Nine days later, the Canadian yield curve is still inverted. Let's
compare what I posted about the curve on January 21 vs. January 30.

Canadian Yield Curve January 21

30-year: 2.044% (Today's Low 1.998%)

10-Year: 1.426% (Today's Low 1.366%)

05-Year: 0.791% (Down 19 basis points, an 18% decline)

03-Year: 0.590% (Down 27 basis points, a 31% decline)

02-Year: 0.560% (Down 29 basis points, a 34% decline)

01-Year: 0.580% (Down 34 basis points, a 37% decline)

01-Month: 0.640% (Down 22 basis points, a 26% decline)

Canadian Yield Curve January 30

30-year: 1.834% (Down 21.0 basis points)

10-Year: 1.250% (Down 17.6 basis points)

05-Year: 0.603% (Down 18.8 basis points)

03-Year: 0.386% (Down 20.4 basis points)

02-Year: 0.392% (Down 16.8 basis points)

01-Year: 0.490% (Down 9.0 basis points)

01-Month: 0.580% (Down 6.0 basis points)

Not only did yields plunge across the board since then, the yield curve is still inverted all the way out to three years.

Recession Has Arrived

There is no point in waiting for further data. The Canadian recession has already arrived.

Canadian Yield Curve March 31

30-year: 1.99%

10-Year: 1.37%

05-Year: 0.78%

03-Year: 0.51%

02-Year: 0.51%

01-Year: 0.58%

03-Month: 0.56%

01-Month: 0.53%

The Canadian yield curve is still inverted albeit very slightly. Instead of attempting to predict the weather, something that is very difficult for economists to do (even in arrears!), perhaps they should watch the yield curve.

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